The next great pyramid game: a disturbing inside peek at China's financial mania.

• Author: Whalen, Christopher

One of the great ironies of 2005 has been to watch the spectacle of cash-flush China push former state-owned companies out into the market to raise even more paper dollars, part of a ritual whereby this very old, corrupt society seeks economic validation. Few of the credulous gringos who today buy shares in Chinese banks and companies know that they follow in a long tradition of western investment in dubious eastern opportunities. Just as foreign investors have made and lost great sums in markets like Russia, Argentina, and our beloved Mexico, the financial bubble in Chinese stocks is the next great paper pyramid game waiting to fall.

China spent more than two centuries tinder foreign colonial rule, but since the end of World War II it has sought to regain independence and prosperity even as Japan, Korea, and Taiwan became the industrial leaders of the world. Mainland China wants a piece of the pie and it is in a hurry. What makes the situation even more ominous in terms of potential financial market system risk is the fact that even very senior gringos have such a hard time telling our brash, always certain friends from China when they are off course. Indeed, the speed at which China is pressing the world for recognition is reminiscent of a young child reading about an exciting subject for the very first time.

In September, China Construction Bank (CCB) ran a quarter-page advertisement in the Financial Times seeking a chief risk officer. The ad was like those published by other global banks announcing an opening for a senior executive, but the CCB ad was several times larger than normal and placed conspicuously near the front of the paper--as though to announce the mere fact that CCB was hiring its first real CRO. Generally speaking, large financial institutions do not find members of the C-suite in such an ostentatious fashion, but then again, CCB and its peers among China's banks are not your usual financial institutions.

The size and placement of the CCB ad typifies the style of China's approach to its growing economic importance. "Everything in China today is louder and more gaudy than ever before," notes one western banker who spent part of his childhood in that nation. "The entire population of China seems both tone deaf and color blind. Nothing else could explain the volume at which Chinese must be spoken and the hideous taste in clothes on display. Material wellbeing has, on the surface, improved over the past decade, but much of what foreigners see is a garish veneer, the image of how China thinks it should look in 2005."

While modern glass buildings grace the main thoroughfares of China's largest cities, they fail to hide the crammed, dreadful, and repulsive living quarters in which the majority of the population continues to dwell. Try as the Chinese government may to project an image of progress and modernity, cracks are apparent (for those who venture from the two immediate blocks...